In the short run, the good news continues.  Over the past year rents are up and concessions are holding steady. Class A vacancy is nation-pacing and per project absorption* is up, in spite of an uptick in the number of newly minted units vying for attention. But with the drought of units built in 2009, and solid performance metrics in 2010, 2011 brought record-setting starts as the market turned around. Therefore, 2013 and 2014 will see a return to a more competitive market due to subdued absorption coupled with the delivery of a large slate of projects. Once again, we are reminded that commercial real estate moves in cycles!

  • In the past 12 months, over 18,000 units have broken ground and over 10,700 new units are expected to deliver over the next year.
  • Annualized Class A absorption of approximately 5,000 units is 10% off the region’s long-term average, easing the structural shift from owning to renting levels off in the Washington region and moderate job growth continues.

Third Quarter 2012 Highlights

  • Stabilized vacancy for investment grade apartments (Class A and B) is 3.8%, up from 2.8% a year ago. With the national rate at 4.8%, Washington has the second lowest vacancy of any major metro area in the nation, behind only New York.
  • Rents for all investment grade apartments were up 2.7% over the past 12 months. Class A rents rose by 3.6% over the past year, the same increase posted during the preceding 12 months.
  • Annual Net Absorption*, at 583 Class A and B apartments (11% of our long term average), declined significantly this quarter, measuring well below the region’s long-term average. This reduction is due to an increase in Class B vacancy, moderating job growth, flattening of the trend toward renting vs. owning in the Washington metro area.   However, the Class A market absorbed 5,023 units.
  • Concessions at Class A projects halted their declines of the first time since the first quarter of 2010. At third quarter 2012, concessions increased slightly to 2.1% of face rent compared to 2.0% of face rent at one year earlier.
  • The development pipeline reached a cyclical low of 16,606 as of year-end 2009. Since then improving market fundamentals and improving development prospects have pushed the pipeline to 34,449 units at year-end 2011.  At third quarter 2012, the number increased again to 36,564, as the market seemed to discount the threat of overbuilding.
  • Construction starts ballooned again this quarter with 6,205 units breaking ground, compared to 1,976 units in second quarter 2012.  As job growth has moderated and deliveries are expected to accelerate during 2013 into 2014, market fundamentals will likely ease as well.

*Annual net absorption = a measure of the total square feet leased in the market over a year taking into consideration  space vacated during that year.